Merrill Lynch Still Sees Massive Opportunities for 5 Top Semiconductor Stocks

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If any sector has become volatile, it’s technology. Given the first-half success for some of the top stocks, especially the vaunted FANG group, it’s not surprising. Nervous investors have a pretty itchy trigger finger when it comes to taking profit, as many of biggest companies in tech have run very hard over the past year. The good news for those looking to be or stay involved in the sector is that many of the stocks remain underowned by institutional accounts.

In a new Merrill Lynch research report, the firm’s outstanding semiconductor analyst Vivek Arya makes the case that he sees very positive opportunities at five top semiconductor companies the firm covers. The report cites a combination of upcoming catalysts and underownership by portfolio managers. All five stocks are rated Buy at Merrill Lynch.

Broadcom

This stock has been on fire over the past year and not only remains a top pick across Wall Street but is also on the Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.

The analysts note that the stock is underowned compared to peers, and the 40% iPhone content growth, combined with the closure of the Brocade purchase, which they feel is accretive, are very positive catalysts. They also feel dividend growth is possible.

Broadcom investors are paid a 1.3% dividend. Merrill Lynch has a $260 price target for the shares. The Wall Street consensus price target is higher at $273.50. Shares closed Thursday at $235.04 apiece.

Analog Devices

This stock spiked recently and has come back into a good buy range. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

The company recently introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The analysts believe that the company is still somewhat underowned and recent worries over iPhone content loss is more than factored into the stock’s current price. Trading at a reasonable 15 times earnings with $5 earnings per share potential, the shares are cheap to historical price-to-earnings levels.

Analog Devices investors are paid a solid 2.32% dividend. Merrill Lynch has a $92 price target. The consensus target is $94.10, and the stock closed Thursday at $77.33 a share.